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LPAMERICAN PUBLIC POWER AMERICAN PUBLIC POWER ASSOCIATIONASSOCIATION
TAX-EXEMPT BONDS:SEC, IRS and Congressional
Initiatives
April 21, 2005
W648471.1W648471.1
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LPCURRENT LEGISLATIVE CURRENT LEGISLATIVE ATMOSPHEREATMOSPHERE
JCT PROPOSALS
SFC INVESTIGATION
BUDGET PICTURE – Search for Revenue Raisers
TAX REFORM
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LP SFC INVESTIGATIONSFC INVESTIGATION
SFC staff sees problems Interest of Senator Grassley Possible areas of concern and
discussions with the IRS
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LP JCT PROPOSALSJCT PROPOSALS
Eliminate advance refundings Demand side changes “Abuses” – pools, stadiums,
Indian Tribes Information reporting
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LPLONGER TERM RISKS -LONGER TERM RISKS -TAX REFORMTAX REFORM
CONSUMPTION-BASED TAXES– TREATMENT OF INVESTMENT
EARNINGS– TAX-EXEMPT ENTITIES– DEDUCTIBILITY OF STATE AND LOCAL
TAXES
REFORM WITHIN THE CURRENT
SYSTEM
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LPTax Reform and the Joint Tax Reform and the Joint Tax Committee ProposalsTax Committee Proposals
Flatter Tax/Lower Top Tax Bracket Higher floor on short-term tax-exempt rates
State/Local Tax Deduction Repeal Increased value to in-state buyersas a trade-off for the AMT
Lifetime Savings Accounts Reduced dollars into tax-exempt mutual funds
Joint Tax Committee Proposals Last minute revenue raisers to close budget gap(esp. § 265 and advance refunding)
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LPSome Some DisclosureDisclosure ConsiderationsConsiderations
More emphasis on better and more real-time reporting of events– Sarbanes Oxley– Central Post Office for NRMSIRs– Real-time trade reporting to the MSRB
“Problem” issues continue to arise– San Diego Pension concerns
Analysts continue to press for more/more frequent information Over the Horizon?
– Need to sign Bond Purchase Agreements the same day to facilitate real-time trade reporting
– Shorter window for disclosure?– More disclosure on contingent liabilities?
• Pensions• Other Post-Retirement Benefits• Derivatives
Auction Rate Bonds– SEC informal investigation– FASB classification of ARS
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LP Tax Credit BondsTax Credit Bonds
What are they? Why use them? Are there risks? Status
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LP Circular 230Circular 230What is Circular 230?
• Proposed rules for tax-exempt bond opinions
• Why is this being done?• The rules govern how bond
counsel renders their opinions• Requires a written description by
bond counsel of facts, law and analysis of tax issues
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LP Circular 230 (cont.)Circular 230 (cont.)Potential Consequences:
• Additional transaction costs• Potential disclosure issue and
higher interest rates• Provides audit roadmap for IRS• Opinion “disclaimer”?• Bond counsel become more
conservative? More aggressive?
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LPCircular 230 - Circular 230 -
FutureFuture• Comments • What happens next?• Regulatory process• Are bond counsel already
reacting?
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LP SLGS - OverviewSLGS - OverviewCurrent flexibility of SLGS regulations provides significant advantages:
• Ability to lock in rates even if transaction is not a sure thing
• Ability to use the “free option” in SLGS to restructure escrows to eliminate negative arbitrage
• Interest rate setting process provides opportunities to eliminate negative arbitrage
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LPSLGS – Proposed SLGS – Proposed ChangesChanges
Proposed Changes to SLGS regulations:• Mandatory use of SLGS-Safe• New interest rate setting procedure• Elimination of ability to change delivery date• Elimination of penalty free cancellation • Requirement that bonds be authorized before
subscription• Requirement that subscriptions be filed by 6 p.m.
eastern time• Eliminate ability to increase yield in purchase or
redemption of SLGS• Why is this happening?
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LPSLGS – ResponseSLGS – Response
Comments:• the SLGS regulations should continue to permit
penalty free cancellation of subscriptions;• in lieu of a requirement that issuers authorize their
bonds prior to subscribing, issuers should be required to certify their intent to issue the bonds;
• the SLGS regulations should continue to permit the delivery date for SLGS to be changed by up to 7 days;
• the period during which SLGS can be purchased should be extended beyond 6 p.m. eastern standard time; and
• the proposal to limit the purchase and redemption of SLGS so that issuers cannot increase the yield on their investments should be eliminated.
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LPEquity First Equity First
Equity first---The Problem IRS Proposal—Advance Notice of
Proposed Rulemaking– For output facilities, private use may be allocated
to equity first– “Equity” only includes taxable bond proceeds
and issuer funds at closing– For the equity first rule to apply, bond proceeds
and equity must have been spent contemporaneously
– The private use and equity must be “allocable” to the same facility for the equity first rule to apply
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LPEquity First – CommentsEquity First – Comments
Comments– The contemporaneous
expenditure requirement should be eliminated (especially for older transactions)
– “Equity” should be defined to include retired tax-exempt bonds
– More flexible allocation rules are needed for this purpose
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LPEquity First -- Status of Equity First -- Status of Allocation and Accounting Allocation and Accounting Regulations and Next Regulations and Next Steps Steps
•Timing•Scope•Opportunity for input
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LPTransmission and Private Transmission and Private Use Use
• RTOs: Private use rules are very favorable for transmission in an RTO
• Other open access: Transmission is subject to the private use rules if used in open access but not as part of an RTO
• Private use regulatory relief not as generous as relief provided to IOUs and Coops in recent legislation
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LPIRS Audit IRS Audit Program—Status Program—Status and Risks and Risks
Status of Audit Program Areas of IRS Focus
– Largely aimed at “abuses”– Selected other areas– Development of IRS “expertise”– Possible expansion of audit
topics
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LPIRS Audit IRS Audit Program—Status Program—Status and Risks and Risks (cont.)(cont.)
Risks and Problems from an IRS Audit– Impact on outstanding bonds– The audit process is stacked against issuers– Difficult to convince the auditors that they
are wrong– No real ability to obtain an independent
review of the matter– IRS doesn’t like to go away empty handed– 6700 penalty threat
Is there any hope for improvement?– NABL ADR proposal– Treasury/IRS interest